[Federal Register Volume 78, Number 215 (Wednesday, November 6, 2013)]
[Notices]
[Pages 66791-66794]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-26555]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70791; File No. SR-CHX-2013-16]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Order Approving a Proposed Rule Change To Adopt Standards for the
Cancellation or Adjustment of Bona Fide Error Trades, the Submission of
Error Correction Transactions, and the Cancellation or Adjustment of
Stock Leg Trades of Stock-Option or Stock-Future Orders
October 31, 2013.
I. Introduction
On September 4, 2013, Chicago Stock Exchange, Inc. (``Exchange'' or
``CHX'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend CHX Article 20, Rule 9 to outline and
clarify the Exchange's current requirements for the cancellation of
trades based on Bona Fide Error and to establish new requirements for
the adjustment of trades based on Bona Fide Error; to adopt CHX Article
20, Rule 9A to detail the Exchange's current requirements for Error
Correction Transactions; and to adopt CHX Article 20, Rule 11 to amend
[[Page 66792]]
the Exchange's current requirements for the cancellation of the stock
leg trade of a Stock-Option order, to establish new requirements for
the adjustment of the stock leg trade of a Stock-Option order, and to
allow the stock leg trade of Stock-Future orders to be cancelled or
adjusted. The proposed rule change was published for comment in the
Federal Register on September 18, 2013.\3\ The Commission received no
comments on the proposal. This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 70381 (September 12,
2013), 78 FR 57431 (SR-CHX-2013-16) (``Notice'').
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II. Description of the Proposed Rule Change \4\
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\4\ A more detailed description of the proposal is contained in
the Notice. See id.
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Current Article 20, Rule 9 governs the cancellation of both trades
based on demonstrable error and stock legs of Stock-Option orders.
Among other things, the Exchange proposes to separate current Article
20, Rule 9 into two different rules: proposed Rule 9 sets forth the
requirements for the cancellation of trades based on demonstrable
error, and proposed Rule 11 sets forth the requirements for the
cancellation of the stock leg of a Stock-Option order.
A. Proposed Article 20, Rule 9: Cancellation or Adjustment of Bona Fide
Error Trades
Proposed Rule 9(a) states that a trade executed on the Exchange in
``Bona Fide Error'' \5\ may be cancelled or adjusted pursuant to this
Rule, subject to the approval of the Exchange. The Exchange notes that
proposed Rule 9 only applies to Bona Fide Error trades that were
executed on the Exchange and, as such, orders that are routed to other
market centers and executed at such away market centers are not within
the purview of proposed Rule 9.\6\
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\5\ Proposed Article 1, Rule 1(hh) defines ``Bona Fide Error''
as: (1) The inaccurate conveyance or execution of any term of an
order, including, but not limited to, price, number of shares or
other unit of trading; identification of the security;
identification of the account for which securities are purchased or
sold; lost or otherwise misplaced order tickets; or the execution of
an order on the wrong side of a market; (2) the unauthorized or
unintended purchase, sale, or allocation of securities, or the
failure to follow specific client instructions; (3) the incorrect
entry of data into relevant systems, including reliance on incorrect
cash positions, withdrawals, or securities positions reflected in an
account; or (4) a delay, outage, or failure of a communication
system used to transmit market data prices or to facilitate the
delivery or execution of an order. Proposed paragraph .01 provides
that proposed Rule 9 applies only to Bona Fide Errors committed by
the Participant that submitted the order to the Matching System or
the customer of the Participant that submitted the order to the
Matching System.
\6\ Although the Exchange anticipates implementing it in the
near future, the Exchange does not currently offer order routing.
See Notice, supra note 3, 78 FR at 57432 n.10.
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Proposed paragraph (b) states that the Exchange may approve a
request for a trade cancellation or adjustment pursuant to this Rule
and take the corrective action(s) necessary to effectuate such a
cancellation or adjustment, provided that the items listed thereunder
are submitted to the Exchange, in a form prescribed by the Exchange, by
the Participant that submitted the erroneous trade. Proposed Rule 9
requires the Participant that submitted the erroneous trade to: (1)
Submit a written request for cancellation or adjustment, including all
information and supporting documentation required by proposed Rule 9,
no later than 4:30 p.m. CST on T+1, except such a request may be
submitted after T+1 in extraordinary circumstances with the approval of
an officer of the Exchange; (2) identify the error that is a ``Bona
Fide Error'' and the source of the Bona Fide Error, and provide
supporting documentation showing the objective facts and circumstances
concerning the Bona Fide Error; and (3) provide supporting
documentation evidencing that all parties consent to the requested
cancellation or adjustment.
Proposed Rule 9(c) provides that a trade adjustment will be made
only to the extent necessary to correct the Bona Fide Error (i.e., to
reflect the original terms of the order).\7\ Under proposed Rule 9(d),
if the Exchange approves a request for a trade cancellation or
adjustment, Exchange operations personnel will effect all corrective
action(s) necessary to effectuate the cancellation or adjustment.
Finally, proposed Rule 9(e) mirrors current Article 20, Rule 9(b)(5)
which provides that failure to comply with the provisions of this Rule
will be considered conduct inconsistent with just and equitable
principles of trade and a violation of Article 9, Rule 2.
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\7\ Proposed Rule 9(c) states that, prior to approving an
adjustment, the Exchange will validate that the proposed adjusted
trade could have been executed in the Matching System at the time
the trade was initially executed, in compliance with all applicable
CHX and Commission rules.
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B. Proposed Article 20, Rule 9A ``Error Correction Transactions''
Proposed Rule 9A adopts requirements for Error Correction
Transactions (``ECTs''). Proposed 9A(a) provides that a Participant may
submit an ECT to remedy the execution of customer orders that have been
placed in error, provided that the following requirements are
satisfied: (1) The erroneous transaction was the result of a ``Bona
Fide Error,'' as defined under proposed Article 1, Rule 1(hh); (2) the
Bona Fide Error is evidenced by objective facts and circumstances and
the Participant maintains documentation of such facts and
circumstances; (3) the Participant recorded the ECT in its error
account; (4) the Participant established, maintained, and enforced
written policies and procedures that were reasonably designed to
address the occurrence of errors and, in the event of an error, the use
and terms of an ECT to correct the error in compliance with this Rule;
and (5) the Participant regularly surveilled to ascertain the
effectiveness of its policies and procedures to address errors and
transactions to correct errors and took prompt action to remedy
deficiencies in such policies and procedures.
Proposed Rule 9A(b) states that an ECT may execute without the
restrictions of the trade-through prohibition of Rule 611, provided
that the ECT is marked with a special Bona Fide Error trade indicator.
Proposed Rule 9A(b) further states that this exemption applies only to
the ECT itself and does not, for example, apply to any subsequent
trades made by a Participant to eliminate a proprietary position
connected with the ECT. Proposed Rule 9A(c) provides that failure to
comply with the provisions of this Rule will be considered conduct
inconsistent with just and equitable principles of trade and a
violation of Article 9, Rule 2.
C. Proposed Article 20, Rule 11: Cancelation or Adjustment of Stock Leg
Trades
Proposed Rule 11(a) states that, unless otherwise expressly
prohibited by the Exchange's rules, a trade representing the stock leg
of a Stock-Option order, as defined under proposed
Article 1, Rule 1(ii) \8\ or a Stock-Future order, as defined under
proposed Article 1, Rule 1(jj),\9\ may be subject to
[[Page 66793]]
cancellation or adjustment by the Exchange pursuant to proposed Rule
11, if the stock leg trade was marked by a special trade indicator when
it was originally submitted to the Matching System.\10\ Proposed Rule
11(a) clarifies that if the stock leg trade was not originally marked
by a special trade indicator, the trade will not be eligible for
cancellation or adjustment, notwithstanding compliance with the other
requirements of this Rule.
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\8\ Proposed Article 1, Rule 1(ii) provides that a ``Stock-
Option'' order is a combination order where at least one component
is a cross order for a stated number of units of an underlying or
related security coupled with the purchase or sale of options
contract(s) on the opposite side of the market representing at least
the same number of units as the underlying or related security
portion of the order.
\9\ Proposed Article 1, Rule 1(jj) provides that a ``Stock-
Future'' order is a combination order where at least one component
is a cross order for a stated number of units of an underlying or a
related security coupled with the purchase or sale of futures
contract(s) on the opposite side of the market representing at least
the same number of units of the underlying or related security
portion of the order.
\10\ This special trade indicator requirement is in current
Article 20, Rule 9(b)(6). The Exchange notes that the purpose of the
special trade indicator is to mark a stock leg trade as being part
of a Stock-Option order and consequently notifies the market after
execution that the trade may be cancelled, as the trade is
contingent upon the execution of non-stock legs that comprise the
total Stock-Option order.
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Cancellation of Stock Leg Trades
Proposed Rule 11(b) outlines the requirements for cancelling a
stock leg trade that is a component of a Stock-Option/Stock-Future
order. Proposed Rule 11(b)(1) provides that the Exchange may approve a
request to cancel a stock leg trade that was originally marked by a
special trade indicator and take the corrective action(s) necessary to
effectuate such a cancellation, provided that certain items are
submitted to the Exchange, in a form prescribed by the Exchange, by the
Participant that submitted the stock leg trade. Proposed Rule 11(b)
requires the Participant that submitted the stock leg trade to: (1)
Submit a written request for cancellation, including all information
and supporting documentation required by proposed Rule 9, no later than
4:30 p.m. CST on T+1, except such a request may be submitted after T+1
in extraordinary circumstances with the approval of an officer of the
Exchange; (2) identify the Qualified Cancellation Basis \11\ and
provide supporting documentation showing the objective facts and
circumstances supporting the Qualified Cancellation Basis; and (3)
provide supporting documentation evidencing that all parties consent to
the requested cancellation.
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\11\ Proposed Rule 11(b)(2) defines the ``Qualified Cancellation
Basis'' as follows: (A) A non-stock leg executed at a price/quantity
or was adjusted to a price/quantity other than the price/quantity
originally agreed upon by all of the parties to the Stock-Option or
Stock-Future order; (B) a non-stock leg could not be executed; or
(C) a non-stock leg was cancelled by the exchange on which it was
executed.
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Adjustments of Stock Leg Trades
Proposed Rule 11(c) adopts new requirements that allow under
specified circumstances adjustments to a stock leg trade that is a
component of a Stock-Option or Stock-Future order. Proposed Rule
11(c)(1) provides that the Exchange may approve a request to adjust a
stock leg trade that was originally marked by a special trade indicator
and take the corrective action(s) necessary to effectuate such an
adjustment, provided that certain items are submitted to the Exchange,
in a form prescribed by the Exchange, by the Participant that submitted
the stock leg trade. It further states that the requirements of
proposed Rule 11(c) must be complied with, to the satisfaction of the
Exchange, before a stock leg trade adjustment pursuant to this Rule may
be approved or any corrective action may be taken.
Proposed Rule 11(c) requires the Participant that submitted the
stock leg trade to: (1) submit a written request for adjustment,
including all information and supporting documentation required by
proposed Rule 9, no later than 4:30 p.m. CST on T+1, except such a
request may be submitted after T+1 in extraordinary circumstances with
the approval of an officer of the Exchange; (2) identify the Qualified
Cancellation Basis \12\ and provide supporting documentation showing
the objective facts and circumstances supporting the Qualified
Cancellation Basis; (3) provide supporting documentation evidencing
that all parties consent to the requested adjustment; and (4) submit a
proposed Adjusted Stock Price or Adjusted Stock Quantity, as detailed
under proposed Rule 11(c)(3).
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\12\ Proposed Rule 11(c)(2) defines the ``Qualified Adjustment
Basis'' as when a non-stock leg executed at a price/quantity or was
adjusted to a price/quantity other than the price/quantity
originally agreed upon by all of the parties to the Stock-Option or
Stock-Future order.
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Proposed Rule 11(c)(3) provides that the Participant that submitted
the stock leg trade may request only one of the following adjustments
per Stock-Option or Stock-Future order: Adjusted Stock Price; Adjusted
Stock Quantity; or Adjusted Stock Quantity (Stock-Option trade only).
Proposed Rule 11(c)(3)(A) details the necessary calculations for
Adjusted Stock Price, where a non-stock leg executed at a price or was
adjusted to a price other than the price originally agreed upon by all
of the parties to the Stock-Option or Stock-Future order and the
parties wish to maintain the original aggregate cash flow of the Stock-
Option or Stock-Future order. Proposed Rule 11(c)(3)(B) details the
necessary calculations for Adjusted Stock Quantity, where a non-stock
leg executed at a quantity or was adjusted to a quantity other than the
quantity originally agreed upon by all of the parties to the Stock-
Option or Stock-Future order. Proposed Rule 11(c)(3)(C) details the
necessary calculations for Adjusted Stock Quantity for a Stock-Option
order only, where an options leg trade executed at a price or was
adjusted to a price other than the price originally agreed upon by all
of the parties to the Stock-Option order and the parties wish to
maintain the original delta-based hedge ratio.
Once the Adjusted Stock Quantity or Adjusted Stock Price has been
presented to the Exchange pursuant to proposed Rule 11(c)(3), pursuant
to proposed Rule 11(c)(4), the Exchange will ascertain whether the
proposed adjusted stock leg trade could have been executed in the
Matching System at the time the trade was initially executed, in
compliance with all applicable CHX and Commission rules. Proposed Rule
11(c)(4) provides that, if the trade adjustment is approved, the
adjustment will be accepted, recorded, and submitted to a Qualified
Clearing Agency, without regard to orders residing in the Matching
System at the time the adjustment is made.
Proposed Rule 11(d) provides that if the Exchange approves a
request for a stock leg trade cancellation or adjustment, any
corrective action(s) necessary to effectuate the cancellation or
adjustment, including, but not limited to, corrective entries into the
Exchange's records and/or corrective clearing submissions to a
Qualified Clearing Agency, will be taken only by Exchange operations
personnel. Finally, proposed Rule 11(e) provides that failure to comply
with the provisions of this Rule will be considered conduct
inconsistent with just and equitable principles of trade and a
violation of Article 9, Rule 2.
III. Discussion and Commission Findings
After careful review, the Commission finds that the Exchange's
proposal is consistent with the Act and the rules and regulations
thereunder applicable to a national securities exchange.\13\ In
particular, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\14\ which requires that the
rules of a national securities exchange be designed, among other
things, to prevent fraudulent and manipulative acts and practices; to
promote just and equitable principles of trade; to remove impediments
to and perfect the mechanism of a free and open market and a national
market
[[Page 66794]]
system, and, in general, to protect investors and the public interest.
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\13\ In approving the CHX proposed rule change, the Commission
has considered its impact on efficiency, competition and capital
formation. 15 U.S.C. 78c(f).
\14\ 15 U.S.C. 78f(b)(5).
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As discussed above, the Exchange proposes to expand Article 20,
Rule 9 to permit the adjustment of Bona Fide Error trades and to
clarify the requirements for cancelling a Bona Fide Error trade. The
Commission finds that proposed Rule 9 is consistent with Section
6(b)(5) of the Act because it should allow the Exchange, through the
cancellation and adjustment of Bona Fide Error trades, to promote the
proper execution of trades, to promote the accurate reporting of
trades, and to potentially prevent excessive reporting of trade
activity to the Consolidated Tape.
Proposed Rule 9(b) enumerates the specific requirements that must
be met by the executing broker Participant before the Exchange can
consider a request to cancel or adjust an erroneous trade. The
Commission believes that these requirements, which are designed to
ensure that Participants can cancel or adjust erroneous trades while
also creating the necessary filters to ensure that the Exchange only
acts upon truly erroneous trades, are reasonable and provide a fair,
objective process by which the Exchange may review requests to cancel
or adjust an erroneous trade. Specifically, the Commission believes
that the requirement that the written request for cancellation or
adjustment be submitted no later than 4:30 p.m. CST on T+1 except in
extraordinary circumstances is reasonable because it affords
Participants with adequate time to identify an erroneous trade and to
prepare its submission request. Additionally, the Commission believes
that the requirements that all parties to a Bona Fide Error trade must
consent to the Participant's request to cancel or adjust the erroneous
trade and that the request to cancel or adjust be supported with
documentation showing the objective facts and circumstances evidencing
the Bona Fide Error should protect all parties to a trade and should
prevent unfair or fraudulent cancellations or adjustments of trades
from taking place. Similarly, the Commission believes that the
requirement in proposed Rule 9(c), that the any potential trade
adjustment will only be taken to the extent necessary to correct the
Bona Fide Error and only if the proposed adjusted trade could have been
executed in the Matching System at the time the trade was initially
executed, should promote the integrity of the market system by ensuring
that all adjusted trades comply with Exchange and Commission rules.
The Commission also finds that proposed Rule 9A, which codifies in
CHX's rules the requirements that a Participant must follow when
submitting an ECT, is consistent with the Act. The Exchange currently
accepts ECTs to remedy the execution of customer orders that have been
placed in error, but does not explain these requirements in its rules.
The Commission believes that the inclusion of these requirements in
CHX's rules should provide clarity and guidance to Participants and
thereby promote the efficient functioning of the securities
markets.\15\
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\15\ The Commission also notes that that the language of
proposed Rule 9A is substantially similar to the key portions of the
Commission order exempting certain error correction transactions
From Rule 611 of Regulation NMS. See Securities Exchange Act Release
No. 55884 (June 8, 2007), 72 FR 32926 (June 14, 2007).
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As discussed in further detail above, proposed Rule 11 expands
situations where a stock leg of a Stock-Option order or Stock-Future
order stock leg may be cancelled and to permit the adjustment of stock
leg trades if the stock leg trade was marked by a special trade
indicator when it was originally submitted to the Matching System. This
proposal allows Participants to adapt to changes to the options or
futures leg of a trade and thereby facilitate the execution of Stock-
Option or Stock-Future orders in ratios as originally agreed by the
parties to the order, which the Commission believes should promote the
efficient functioning of the securities market.
The Commission also finds that the requirements in proposed Rule
11(b) that a Participant must satisfy to request cancellation of a
stock leg trade are consistent with the Act. The requirements contained
in Rule 11(b)--that all parties submit a timely request no later than
4:30 p.m. CST on T+1, that the submitting Participant supports its
request with appropriate documentation, and that all parties consent to
the submission of the cancellation request--track those of Rule 9(b),
and the Commission believes they are consistent with the Act for the
reasons discussed above. In addition, the Commission believes that
requiring the submitting Participant to identify the Qualified
Adjustment Basis is reasonable because it should allow the Exchange to
more quickly act upon the Participant's request for cancellation under
proposed Rule 11(b).
Further, the Commission believes that proposed Rule 11(c), which
proposes to allow adjustments of the stock leg trade, should prevent
excessive reporting of activity to the Consolidated Tape and thereby
should enhance the integrity of the securities markets by removing
duplicative trade reports. As with proposed Rules 9(b) and 11(b), the
Commission believes that the requirements of proposed Rule 11(c)--that
a submitting Participant must comply with T+1 requirement, identify the
qualified adjustment basis, ensure that all parties consent to the
request, and support its submission with a proposed Adjusted Stock
Price or Adjusted Stock Quantity--are consistent with the Act for the
reasons discussed above. The Commission also believes that the
Exchange's detailed methodology for determining and verifying the exact
adjusted terms of a trade are adequate to effect the intent of the
parties to the trade and ensure that any adjustments will be consistent
with the rules of the Exchange and the Commission, including Rule 611
of Regulation NMS.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\16\ that the proposed rule change (SR-CHX-2013-16) be, and it
hereby is, approved.
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\16\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-26555 Filed 11-5-13; 8:45 am]
BILLING CODE 8011-01-P